“Yet Another Hierarchical Officious Oracle” is Yahoo!, of course. And, its lawyers should be embarrassed by Yahoo!’s inability to create enforceable online Terms of Service (TOS).
The issue arose in Ajemian v. Yahoo!, decided by the Massachusetts Appeals Court on May 7, 2013. In this case the plaintiffs were the administrators of a decedent’s estate. They wanted access to the decedent’s email account to let his friends know of his death and memorial service, and later to locate assets of his estate. Yahoo! refused to provide the online password, and the administrators filed suit in Massachusetts to compel access.
Yahoo!, in turn, argued the suit should have been brought in California and, in any event, it was too late. These arguments were based on Yahoo!’s terms of service which provide, in part, as follows:
You and Yahoo agree to submit to the personal and exclusive jurisdiction of the courts located within the county of Santa Clara, California…. You agree that regardless of any statute or law to the contrary, any claim or cause of action arising out of or related to use of the Service or the TOS must be filed within one (1) year after such claim or cause of action arose or be forever barred.”
The decedent in this case had opened his account in 2002, and he died in 2006. In the interim Yahoo! had updated its TOS to provide that “any rights to your Yahoo! ID or contents within your account terminate upon your death,” providing Yahoo! with another basis on which to deny the administrators access to the email account.
According to the Appeals Court, this was the first time a Massachusetts state court had been asked determine to the enforceability of an online agreement of this sort. The court found that Yahoo! was unable to establish the legal requirements necessary to enforce this provision:
The burden is on Yahoo! to demonstrate that the forum selection and limitations clauses in the TOS were reasonably communicated and accepted. … The only information on this point is Yahoo!’s affidavit stating that “[p]rospective users are given an opportunity to review the Terms of Service and Privacy Policy prior to submitting their registration data to Yahoo!.” Standing alone, this is not enough to establish that the forum selection provision and limitations provision of either the 2002 or the amended TOS were reasonably communicated, or to whom they were communicated. We do not know, and cannot infer, that the provisions of the 2002 TOS were displayed on the user’s computer screen (in whole or in part). It is equally likely … that the user was expected to follow a link to see the terms of the agreement. If that was the case, the record would need to contain information concerning the language that was used to notify users that the terms of their arrangement with Yahoo! could be found by following the link, how prominently displayed the link was, and any other information that would bear on the reasonableness of communicating the 2002 TOS via a link.
Yahoo! submitted nothing to establish whether or how the provisions of the 2002 TOS were accepted by [Yahoo! end users] or how the provisions of the amended TOS were accepted by [Yahoo! end users] , or how they manifested their assent.
Although forum selection clauses contained in online contracts have been enforced, courts have done so only where the record established that the terms of the agreement were displayed, at least in part, on the user’s computer screen and the user was required to signify his or her assent by clicking “I accept.” … This is known as a “clickwrap” agreement. … By contrast, a “browsewrap” agreement is one “where website terms and conditions of use are posted on the website typically as a hyperlink at the bottom of the screen.” Although forum selection clauses have almost uniformly been enforced in clickwrap agreements, we have found no case where such a clause has been enforced in a browsewrap agreement.
The fact that this case arose in the context of administrators seeking access to a decedents email account made it a harder case. In fact, the Appeals Court held that even if Yahoo! had used a clickwrap agreement, it would not be reasonable to enforce the forum selection and limitations clause against the administrators based on a variety of considerations, including the fact that the case was in probate court, that the decedent lived in Massachusetts, that the administrators are in Massachusetts and the scope of the forum selection clause (which, the Court of Appeals noted, was of unreasonable breadth for a consumer contract).
Nevertheless, the court’s holding with respect to the enforceability of “clickwrap” agreements and lack of enforceability with respect to “browsewrap” agreements stands as the current state of the law in Massachusetts, probate court or not. Simply put, browsewrap areements are not enforceable under Massachusetts law.
The inability to create an enforceable online license seems almost endemic to online companies. Craigslist failed in the 3Taps case (post here). Zappos failed in the Security Breach Litigation (post here). CollegeSource failed in its case against AcadamyOne (post here).
In the Yahoo! case the Massachusetts courts joins the majority across the country: get consent by means of a click, and if you update your TOS, get consent again.
Of course, this case also raises a bigger issue surrounding email accounts and social media – who is entitled to access an email account after the owner’s death? What about a Facebook, Twitter or other social media account? Facebook has addressed the digital afterlife by allowing relatives to memorialize an account after its owner has died. And, Google lets account owners “plan their digital afterlives” with “inactive account manager.” So, perhaps a second lesson from this case—and a more important one—is to exercise one of these options where it is available, or make sure your heirs are able to access your online accounts by using your passwords after your death.*
*Personal note: when my father died in 2010 he had not left a record of his AOL email log-in information. However, AOL was more accommodating than Yahoo! A phone call to AOL was all it took to get his user name/password.
Assume a software vendor makes advertising clams regarding its product’s functionality. However, its end-user license agreement (EULA) is very narrow – it provides a 30 day express warranty that (i) “the medium (if any) on which the [s]oftware is delivered will be free of material defects” and (ii) that “the software will perform substantially in accordance with the applicable specification.” Assume further that that software performs in a manner consistent with the “applicable specification” (the user manual) but inconsistent with advertising claims for the product. In fact, not surprisingly given that this case is in federal court, it malfunctions and wipes out the data on the purchaser’s hard drive.
You might think that the EULA would prevent a purchaser from claiming breach of express warranty, but under Delaware law (and the law of most states) you would be incorrect.
AVG Technologies is the seller of PC TuneUp. In Rottner v. AVG Technologies, Massachusetts U.S. District Court Judge Richard Stearns, applying Delaware law (as stipulated in the EULA) ruled on this issue in the context of AVG’s motion to dismiss. He held that AVG’s advertising claims must be viewed as part of the express warranty for PC TuneUp, despite the EULA’s attempt to disclaim them:
I am confident that the Delaware courts would consider PC TuneUp’s claimed functionality as an express warranty separate and apart from the EULA’s content-less warranty provisions. … Here, although the EULA disavowed previous representations, PC TuneUp software trumpets announcements about its functionality (which track the internet advertising claims) each and every time it is run. These claims, therefore, also form an express warranty on which Rottner may properly allege to have relied.
Judge Stearns further held that because the express warranties form a basis of the parties’ bargain, the plaintiff had also fairly alleged claims for breach of contract and the implied covenant of good faith and fair dealing. And, as if this were not enough, to make matters worse the plaintiff is seeking class action certification on these claims.
This decision addresses a number of other issues, including the enforceability of the Delaware choice-of-law provision and whether the sale of the software at issue should be treated as a service or a good (in the latter case it would be subject to the provisions in the Uniform Commercial Code). On the “service vs. good” issue, Judge Stearns ruled that a straightforward software download should be treated as a “good,” and therefore was subject to the UCC, a conclusion that favored the plaintiff and led to the holding that the EULA did not protect AVG from a claim of breach of express warranty.
But, the most important take-away from this case is that a software vendor’s EULA does not create an impenetrable legal wall of safety for the vendor. Marketing claims may be deemed to be part of the express warranty, notwithstanding attempts to disclaim them in the EULA.
A lot of people blogged for The Huffington Post for free between 2005 and 2011. But after Huffpost was sold to AOL for $315 million in 2011, they had second thoughts about their generosity. They filed a class action seeking compensation for their work based on claims of unjust enrichment and deceptive business practices, seeking one-third of that money for the bloggers. The trial court, and now the Second Circuit, rejected their claims. As the Second Circuit stated early this week in Tasini v. AOL (2d Cir. Dec. 12, 2012):
Plaintiffs’ basic contention is that they were duped into providing free content for The Huffington Post based upon the representation that their work would be used to provide a public service and would not be supplied or sold to “Big Media.” Had they known that The Huffington Post would use their efforts not solely in support of liberal causes, but, in fact, to make itself desirable as a merger target for a large media corporation, plaintiffs claim they would never have supplied material for The Huffington Post.
The problem with plaintiffs’ argument is that it has no basis in their Amended Complaint. Nowhere in the Amended Complaint do plaintiffs allege that The Huffington Post represented that their work was purely for public service or that The Huffington Post would not subsequently be sold to another company. To the contrary, plaintiffs were perfectly aware that The Huffington Post was a for-profit enterprise, which derived revenues from their ubmissions through advertising. Perhaps most importantly, at all times prior to the merger when they submitted their work to The Huffington Post, plaintiffs understood that they would receive compensation only in the form of exposure and promotion. Indeed, these arrangements have never changed.
Tom said to himself that it was not such a hollow world, after all. He had discovered a great law of human action, without knowing it – namely, that in order to make a man or a boy covet a thing, it is only necessary to make the thing difficult to attain. If he had been a great and wise philosopher, like the writer of this book, he would now have comprehended that Work consists of whatever a body is obliged to do, and that Play consists of whatever a body is not obliged to do. And this would help him to understand why constructing artificial flowers or performing on a tread-mill is work, while rolling ten-pins or climbing Mont Blanc is only amusement. There are wealthy gentlemen in England who drive four-horse passenger-coaches twenty or thirty miles on a daily line, in the summer, because the privilege costs them considerable money; but if they were offered wages for the service, that would turn it into work and then they would resign.
In an earlier time, I think Ms. Huffington would rarely have been required to lift a paintbrush.
An interesting “David v. Goliath” jury trial is scheduled to begin in Massachusetts U.S. District Court Judge Patti Saris’s Boston courtroom this week. The case has received a fair amount of press coverage, but not nearly enough in my opinion. (Steven Syre Boston Globe column today, July 2012 NYT article).
The events in Baker v. Goldman Sachs date back to the heady days of the dotcom era. In short, James and Janet Baker (pictured here) spent much of their careers pioneering speech recognition technology which they commercialized under their company Dragon Systems, based in Newton, Massachusetts. The Bakers were legendary in the Massachusetts tech community in the 1990s – home-based technologists who came up with a promising-today, sky-is-the-limit-tomorrow technology.
In 2000 they sold Dragon for almost $600 million to Lernout & Hauspie, a Dutch company. Unfortunately, they were paid fully in Lernout stock, and almost immediately after the sale Lernout was discovered to have been cooking its books. The stock went to zero, and so did the consideration the Bakers received for their company. For the Bakers, this was a business catastrophe of mythical proportions. One day they owned an immensely valuable company that that owned technology they had spent decades developing. The next day they had sold the company in exchange for almost $600 million of Lernout stock. Within a few months, their company was gone and their stock worth nothing.
Goldman Sachs was the “investment banker” for Dragon’s sale to Lerner, and the question is, why didn’t they discovery that Lernout was a shell game? The gist of the Baker’s case is that Goldman (which received $5 million in fees) breached various legal obligations to Dragon by failing to discover that Lerner was “all hat, no cattle.” According to Steven Syre’s column, after Dragon’s salel to Lernout The Wall Street Journal simply called purported L&H customers and discovered they weren’t doing business with Lernout, something the Bakers claim that Goldman should have uncovered as part of its due diligence before the sale. In fact, it appears that Lernout’s Asian business—a significant part of its overall revenues—was a sham. Lernout had fabricated almost $400 million in income.
To make matters worse, the Times article asserts that Goldman assigned a young (20s and 30s) and inexperienced team to handle the deal. The Bakers’ court filings claim that Dragon and the Bakers fell victim to a massive fraud, that there were many “red flags” that Goldman failed to pursue in due diligence, and that had Goldman done the job it promised to do, the sale never would have occurred. In fact, the Bakers claim that Goldman had discovered problems with Lernout on behalf of another client, and failed to disclose these problems, or raise its level of investigation based upon this knowledge.
The full story is complex, and involves many different actors at Dragon, Goldman and various accounting and law firms. The question of who should have discovered Lernout’s fraud involves more finger-pointing than the presto movement in a piano concerto for four-hands. Of course, the Bakers (local scientists with significant bona fides) are far more sympathetic than the Goldman witnesses, many of whom left Goldman shortly after the sale to Lernout closed in June 2000. It remains to be seen whether they can hold their own as trial witnesses. Goldman Sachs’ credibility? Well, the Bakers must hope they draw a jury that reads the business pages.
While in the eyes of a non-lawyer the facts (as alleged) appear to favor the Bakers, Goldman has a number of technical legal defenses, and while it’s had little success with them before Judge Saris, presumably it hopes to prevail on them on appeal. For example, it argues that it was not responsible for the due diligence that would have uncovered the irregularities in Lerner’s sales numbers — Dragon’s accountants were responsible for this task. It claims that Lerner’s fraud was essentially undiscoverable by Goldman. It’s trump card is that the Bakers are caught in a legal catch-22: since Goldman Sachs’ engagement letter was with Dragon (the corporation), the Bakers lack legal standing as individual shareholders. And, since Dragon was merged into Lernout (and therefore for reasons arising out of bankruptcy law had no right to sue), Goldman is immune from liability to Dragon. Since neither the Bakers nor Dragon has standing, Goldman has no liability. Thus far the Bakers have been able to side-step this argument (arguing, for example, that they are third-party beneficiaries to the contract), but this issue remains unresolved, and could prove to be a get-out-of-jail-free card for Goldman.
The parties’ joint pretrial memo, outlining the many legal and factual issues, is linked below.
It is surprising that this case has not yet settled (the vast majority of civil cases—estimated as high as 95%—do). However, cases often settle “on the courthouse steps” or during trial. In fact, the trial judge in this case has been known to require party principals to hold a settlement conference following opening statements at trial. The idea is that once the parties get a look at a real jury, and hear the opposing attorney’s opening statement, they may adjust their expectations and reach a settlement.
If this case doesn’t settle it is almost certain to raise interesting and important investment banking legal issues both during trial, and on appeal to the First Circuit. Presumably, Goldman Sachs has revised its engagement letters.
Update: The jury found against the Bakers at trial.
Custom software development agreements that go awry and end up in litigation are notoriously difficult cases.
The reasons for this (to name just a few) are the finger-pointing (“your fault, no yours”), the complexity, ambiguity or incompleteness of the functional/technical specifications, the presence of third-party developers or hardware vendors (who can also be blamed), and the obscure, technical nature of the cases, which make them distasteful to judges and dull to juries.
Massachusetts U.S District Court Judge Richard G. Stearns issued a rare decision in one of these disputes last week. The case, Liberty Bay v. Open Solutions, involved loan origination software developed under a standard, milestone payment-based License Agreement. After a four year development project plagued with difficulties the Client terminated the agreement and the software Vendor filed suit, seeking the balance owed under the license agreement. The Client, for its part, wanted a refund of monies paid and additional consequential damages. Each side asked the court to issue summary judgment in its favor, and Judge Stearns wrote a decision addressing the contentions.
The background of the case is typical of thousands of similar projects. The project went off-schedule almost from the start. After a series of delays and defective deliveries the Client terminated the agreement and demanded a refund of monies paid to date. The Vendor asked for more time, and the Client agreed to provide it. However, subsequent attempts to deliver a working product were also unsuccessful.
Finally, the Vendor informed the Client that it would not continue to work on the project unless the Client caught up on scheduled payments that were past due. When the Client refused to make these payments the Vendor stopped work and the Client terminated the License a second time, following which it filed suit seeking damages.
Judge Stearns’ treatment of the case illustrates some of the pitfalls in software development disputes. Sadly for the Vendor, it was on the losing end more often than not.*
*While the case was decided under New York law (as specified in the License Agreement), New York and Massachusetts contract law are similar in most respects.
First, the court held that while the Client had waived the time for performance provided in the License Agreement by permitting the Vendor to continue to work on the project after the first termination letter, the extension was not “indefinite,” but only for a “reasonable amount of time.” The judge concluded that after the Vendor had failed to deliver after an additional year had passed this implied extension had expired, putting the Vendor in material breach of the agreement.
Second, the judge rejected the Vendor’s argument that the Client had waives its right to seek a refund after gaving the Vendor a “second chance” following the first termination. The Client did not waive its right to object to subsequent breaches of the same term (that is, failure to deliver a working product).
Third, while the Client was in breach of the payment schedule prior to the “go-live” (or final delivery) date, the Vendor tacitly approved an extension of the Client’s payment obligations when it continued to work without being paid according to the contract schedule. Therefore, the Client’s non-payment was not a defense to its breach of contract claims. If the Vendor had informed the Client that it was working “under protest” the Vendor might have had a stronger argument on this point, but it’s failure to do so doomed this argument.
Although the Client won on these issues, it lost on another. The License Agreement contained a common provision limiting the Client’s damages to monies paid and (belt and suspenders), prohibiting it from recovering consequential damages. Therefore, its claim for lost profits and “lost employee time” were barred. It was limited to recovering monies it had paid under the agreement, probably poor consolation for the loss of use of the system, the investment of management time and the likely higher cost of starting over. The decision makes no mention that the License Agreement provided for the recovery of attorney’s fees, and therefore this unknown amount must be subtracted from the Client’s recovery.
Software contract litigation can be exceedingly complex. This case barely touches on the potential issues. For an article discussing some of these issues in more detail see — Litigating Computer-Related Breach of Warranty Cases.
It’s easy to create an enforceable online “click-wrap” agreement. But, as two recent cases remind us, it’s also easy to do it wrong. Two recent cases are a reminder of this.
In the first case, In re Zappos.com Security Breach Litigation, Zappos was sued in connection with a large data security breach. Responding to the predictable class action lawsuit, Zappos argued that the plaintiffs were required to arbitrate under Zappos’ online user agreement. However, Zappos didn’t have a ‘user agreement,” it only had terms and conditions. And, it did not require purchasers to “click through” to indicate acceptance of those terms. The terms, which included the arbitration requirement, were under a link users were not even required to access while making a purchase, much less consent to. Quoting the court:
we cannot conclude that Plaintiffs ever viewed, let alone manifested assent to, the Terms of Use. The Terms of Use is inconspicuous, buried in the middle to bottom of every Zappos.com webpage among many other links, and the website never directs a user to the Terms of Use. No reasonable user would have reason to click on the Terms of Use, . . .
. . . The arbitration provision found in the Zappos.com Terms of Use purportedly binds all users of the website by virtue of their browsing. However, the advent of the Internet has not changed the basic requirements of a contract, and there is no agreement where there is no acceptance, no meeting of the minds, and no manifestation of assent. A party cannot assent to terms of which it has no knowledge or constructive notice, and a highly inconspicuous hyperlink buried among a sea of links does not provide such notice. Because Plaintiffs did not assent to the terms, no contract exists, and they cannot be compelled to arbitrate.
To make those terms enforceable Zappos needed to require purchasers to affirmatively signal their assent by “clicking” their agreement to be bound. It failed to do this, and therefore the terms were not binding. Zappos might have been better off in arbitration, but it’s stuck in court.
The second case, Schnabel v. Trilegiant (2d Cir., Sept. 7, 2012), is not an online license case per se, but it makes the same point. In this case the web site, a membership organization, emailed (or, if the email bounced, snail-mailed) terms and conditions to new members after they had already joined. The terms contained an arbitration clause. Could the plaintiff be required to arbitrate based on this “after the fact” mailing? Not under the circumstances in this case. The Second Circuit held:
a reasonable person would not be expected to connect an email that the recipient may not actually see until long after enrolling in a service (if ever) with the contractual relationship he or she may have with the service provider, especially where the enrollment required as little effort as it did for the plaintiffs here. In this context the email would not have raised a red flag vivid enough to cause a reasonable person to anticipate the imposition of a legally significant alteration to the terms of conditions of the relationship with [the defendant].
You might not know it from these two cases, but this is not rocket science: require customers to affirmatively consent to online terms before they perform the transaction, and the agreement likely will be enforceable.
Oh, one more thing – don’t state that the terms can be changed at any time, at the whim of the site owner, without obtaining new assent by the customer. A lot of terms contain a provision to this effect, but as the court noted in the Zappos case, where the site owner reserves the unilateral right to revise the online terms the contract becomes “illusory, and therefore unenforceable.” The district court in Zappos cites many of the cases applying this principle to online agreements. For a 2009 blog post discussing this aspect of online agreements, see here.
A contract between a company and its supplier states that the supplier shall not “develop any other product derived from or based on” the company’s product. Can the company enforce this provision against the supplier when the supplier develops a product that does not appropriate any trade secrets or novel features of the company’s product?
Not according to a decision of the First Circuit issued on September 4th.
Where the features of the product are well known in the art, and there has been no appropriation of novel features of the product, such a contract provision cannot be used to enjoin sales of the “derived” product: “a private contract may restrict copying of an idea that was not in the public domain at the time of contracting, but may not withdraw any idea from the public domain.”
The ConnectU/Facebook legal saga is truly astounding. Imagine a mature Oak tree. Now give the it properties of Kudzu vine (the “vine that ate the South”). Each branch of this tree is another lawsuit involving ConnectU, Facebook, the principals, and their lawyers.
Now, a new branch has burst forth. Wayne Chang has sued ConnectU and its lawyers in Superior Court Business Litigation Session in Suffolk County, Boston, claiming that Chang is entitled to as much as 50% of the value of the ConnectU/Facebook settlement (so called, since ConnectU has challenged the finality of the settlement).
… says Professor Eric Goldman, in his apologetically belated comments on Harris v. Blockbuster Inc., (N.D. Tex. April 15, 2009). I discussed this case briefly in April, shortly after the decision was published. To reprise, the court held that an arbitration clause in Blockbuster’s online t’s and c’s was unenforceable because Blockbuster was permitted to unilaterally amend the contract without notice.
Prof. Goldman’s take on it (in addition to the title of this post), is –
This language has a significant risk of killing the entire contract, which would strip away a lot of very important provisions that should be/need to be in the contract. So far Blockbuster has only lost its mandatory arbitration clause, but it’s possible other important risk management clauses (warranty disclaimer, liability limits, dollar caps, etc.) will similarly fall. If those clauses fail, let the plaintiff feasting begin!
Although I don’t have any great practice-oriented recommendations based on this opinion, I do hope this opinion will help contribute to the demise of the “check back frequently for amendments” provisions in online user agreements. I’ve always considered those among the worst excesses of the dot com era.
Here’s an interesting case out of the U.S. District Court, Northern District of Texas. In Harris v. Blockbuster the court refused to enforce an arbitration provision in Blockbuster’s online click-wrap agreement. The reason was that Blockbuster’s click-wrap contract was unilaterally modifiable by Blockbuster. Here is the key paragraph, which is still on the Blockbuster Online site as of today:
These Online Rental Terms and Conditions are subject to change by Blockbuster at any time, in its sole discretion, with or without advance notice. The most current version of the Online Rental Terms and Conditions, which will supersede all earlier versions, can be accessed through the hyperlink at the bottom of the blockbuster.com site. You should review the Online Rental Terms and Conditions regularly, to determine if there have been changes. Continued use of your BLOCKBUSTER Online membership constitutes acceptance of the most recent version of the Online Rental Terms and Conditions.
Yep, I’m sure many Blockbuster subscribers check Blockbuster’s online T&Cs regularly to see if they’ve changed. Shame on you if you don’t!
The court wrote:
The Court concludes that the Blockbuster arbitration provision is illusory . . . . There is nothing in the terms and conditions that prevents Blockbuster from unilaterally changing any part of the contract other than providing that such changes will not take effect until posted on the website. The Court concludes that the Blockbuster arbitration provision is illusory . . . .
There are a lot of online contracts like this, and if the N.D. TX decision is good law (which is questionable), their enforceability it in question.
The terms “unjust enrichment,” “restitution,” “quasi-contract” and “constructive trust” cause the average lawyer to recoil with apprehension (although she doesn’t show it, of course). We were forced to grapple with some of these ancient legal concepts in law school, but we quickly migrated to more modern legal principles, and although we may have remembered the terms (any lawyer worth his salt can throw around the terms unjust enrichment and restitution), the depth of knowledge of most lawyers on these topics is shallow at best. We were relieved when we could move on to things like the Uniform Commercial Code, which dates back only to the early 1950’s.
In fact, it’s easy to trace “unjust enrichment” and related terms back as far as the 1600s, and earlier. A search on Google Book Search reveals a volume titled “Unjust Enrichment in England before 1600.” References to Roman Law are also not difficult to find. When you start dealing with legal principles forged during the Middle Ages or Roman times, you know it’s going to be difficult.
Imagine, then, how QLT, Inc., a Canadian-based biopharmaceutical company, felt when it learned that it had been sued in federal court in Massachusetts and that the outcome of the case hinged on the application of these ancient legal doctrines? That was the situation that QLT faced. Even worse, QLT found itself in the courtroom of U.S. District Judge William Young, one of those rare judges who never backs down from a challenge, and probably mastered Latin so he could read the ancient legal texts in the original.
In early January the U.S. Court of Appeals for the First Circuit issued a decision, affirming a $100 million-plus judgment against QLT. The facts of the case are complex, but the First Circuit summarized them nicely in the opening paragraph of its 64 page decision:
These appeals require us to grapple with the metes and bounds of Massachusetts unjust enrichment and restitution law. Like many such cases, the present case involves one party’s conferral of a valuable benefit during ongoing contract negotiations, followed by an irreparable breach in the bargaining process. What makes this case unusual is that its subject matter — the development of a blockbuster pharmaceutical — poses challenges in valuing the benefit conferred, . . . . Defendant QLT Phototherapeutics, Inc. (“QLT”) appeals a jury finding that it was unjustly enriched because plaintiff Massachusetts Eye and Ear Infirmary (“MEEI”) conferred on QLT several benefits during the course of the development of Visudyne, a successful (and highly profitable) treatment for age-related macular degeneration (“AMD”), a leading cause of adult blindness.
The Court of Appeals decision is a tour de force on the law of unjust enrichment in Massachusetts, and although not binding on the Massachusetts state courts, is likely to be the guiding case in this area until something more authoritative comes along from the Massachusetts state courts. After a recitation of the well-known legal standard for unjust enrichment (see the three-part standard at bottom**), where the case got interesting was when the court held that:
the “benefit conferred” under this doctrine did not require proof of a “trade secret.” The First Circuit affirmed Judge Young’s decision to allow the jury to to proceed to an unjust enrichment verdict based on the plaintiff’s ownership of merely “confidential information.” “Confidential information” and “trade secrets” are two different things, with confidential information generally being things such as pricing or marketing plans – information of some value, but usually ephemeral in nature. Trade secrets tend to be proprietary formulas, algorithms, things that are of lasting value and importance. However, the First Circuit held that mere “confidential information” could be used to support a claim of unjust enrichment. This holding is noteworthy, and it opens to door to a category of claims that would have been precluded had the court held otherwise. Unjust enrichment may not stand where the benefit is publicly available information, but almost anything short of that can be deemed confidential, and will support a claim.
The First Circuit held that while a plaintiff may not recover its lost profits under a theory of unjust enrichment, it could force the defendant to disgorge its profits. Although Massachusetts courts have not spoken on the issue of profit disgorgement in the context of quasi-contracts, the First Circuit held that it was “likely” it would rule as described. Thus, the court clarified the measure of damages in unjust enrichment cases, again to the benefit of plaintiffs.
(** The elements of unjust enrichment are: (1) a benefit conferred upon the defendant by the plaintiff; (2) an appreciation or knowledge by the defendant of the benefit; and (3) acceptance or retention by the defendant of the benefit under the circumstances that would be inequitable without payment for its value.)
For more years than I can remember we’ve been warning clients that an employee handbook can create unintended legal obligations. A case decided by the Supreme Judicial Court late last year (December 2008), serves as a reminder of this hazard. The court found that a sick day policy contained in a handbook bound the Mass Turnpike Authority to pay certain benefits.
The case attempts to leave the issue of whether a handbook creates a binding obligation open to a case-by-case analysis (especially when it comes to promises of employment to at-will employees, where it seems less likely that a handbook can get employers in trouble), but the fact remains that this is an area fraught with risk. Who even wants to go through the hassle and expense of defending one of these cases, when they are so easy to avoid? Placing a prominent “disclaimer” at the front of the book will do the job:
“This handbook is is presented as a matter of information only and its contents should not be interpreted as a contract or other form of obligation between the firm and any of its employees”
Rarely does the law make avoiding a legal headache so simple.
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The gist of the Baker’s case is that Goldman (which received $5 million in fees) breached various legal obligations to Dragon by failing to discover that Lerner was “all hat, no cattle.” According to 
fraught with risk. Who even wants to go through the hassle and expense of defending one of these cases, when they are so easy to avoid? Placing a prominent “disclaimer” at the front of the book will do the job: